Earning green by being green: a meta-analysis on corporate environmental responsibility and earnings management

What the paper says

Purpose This study aims to examine companies’ socially responsible behaviors by studying the relationship between different proxies of corporate environmental responsibility (CER) and earnings management (EM) with emphasis on companies’ pro-environmental behavior and business ethics domain. Design/methodology/approach This meta-analysis synthesized the results from 31 studies with 110,024 firm-year observations concerning the relationship between CER and EM. The study has used corporate environmental disclosure index, corporate environmental performance ratings (CEPR), corporate environmental performance indicator and environmental regulations as proxies for CER to investigate the meta-results. Furthermore, the research then used emission level (measured using per capita CO2 in metric tons), human development index for economic development, number of environmental mandatory policies (measured using Carrots and Sticks Report 2023) and western vs eastern culture as moderator variables. Findings The findings of this study revealed a significant negative relationship between CER and EM. Among different combined proxies of CER, CEPR reveal a significant and negative relationship with EM. Furthermore, the study suggests that future studies can explore this understudied area using proxies of EM, i.e. real EM, earnings persistence, value relevance and accounting conservatism. Practical implications This study offers insights to managers for transparent auditing and supports CER as a long-term sustainability plan. The regulators need to develop a global framework for environmental responsibility that does not compromise the quality of nonfinancial disclosers. Social implications The findings of this study provide valuable insights for investors to make more informed decisions regarding green investments and suggest implications for policymakers to promote policies related to environmental sustainability and corporate transparency, thereby benefiting both investors and society. On a global scale, this study contributes to discussions concerning the alignment of corporate behavior with long-term environmental and financial integrity. Originality/value The meta-analysis addresses the long-standing two-decade debate of 2003–2023 on whether companies use CER as a transparency tool or use it as a greenwash to conceal their unethical earnings practices. To the best of the authors’ knowledge, this is the first meta-analysis to provide a comprehensive view to measure CER using different proxies to examine corporate ethical earnings behavior.